OECD Business and Finance Outlook 2017: Highlights

HIGHLIGHTS
OECD Business and Finance Outlook 2017

“Strengthened OECD standards and enhanced
international co-operation could help forge
a more level playing field in international
markets so that the benefits of globalisation
can be shared by all.”
Angel Gurría, OECD Secretary-General

IN THE OUTLOOK
Overview of globalisation and the role of international governance
Globalisation and the level playing field
The internationalisation of state-owned enterprises
Protecting and promoting competition in a global marketplace
Moving towards a more responsible globalisation
Towards strengthened global standards and
international co-operation
Globalisation has become associated with difficulties for less-skilled workers,
inequality and a general sense that it is not working for large sections of society, in
both advanced and emerging economies. There is much to be done with domestic
policy to improve outcomes, but there is also a strong need for better alignment of
domestic and international policies and a more level playing field in the cross-border
activities of businesses. This requires a commitment by countries participating in
globalised markets to a common set of transparent principles that are consistent
with mutually-beneficial competition, trade and international investment. But the
governance of trade, international investment and competition has not advanced
enough at the global level to foster better outcomes.
The 2017 edition of the OECD Business and Finance Outlook
focuses on ways to enhance “fairness”, in the sense of strength-
ening global governance, to ensure a level playing field in trade,
investment and corporate behaviour, through the setting and
better enforcement of global standards. It provides a brief review of
important developments contributing to post-war globalisation and
covers a number of policy domains. These include, exchange rates
and capital account management, financial regulation since the
recent financial crisis, the rising weight of state-owned enterprises
in the global economy, competition policy to deal with international
cartels, the cost of raising capital, responsible business conduct
and bribery and corruption.
The Outlook is complemented by a sister publication,
the OECD Business and Finance Scoreboard 2017.
The Scoreboard contains indicators and data that support analysis of
developments in the financial markets and corporate sector.

2
To set the scene for this discussion, the Outlook examines two issues:
n The impact of the greater role of emerging markets on world trade;
n The effects of this and technological advances on labour markets,
and the “hollowing out” of the middle class in advanced countries.
First, with respect to trade, evidence shows that post-2001 there is a 15% to 18% rise on average of
all bilateral exports (not just those with emerging markets) due to the increased overall size of the world
market. Second, as economic theory would predict, wage growth and employment for low-skilled workers
in advanced economies were affected as developing-economy workforces began to be integrated into
global value chains. Labour market mobility in advanced countries in particular has been limited—impacted
workers are not moving to new locations and industries. Those suffering from the “downside” of more trade
openness and related technological change have been unable to adjust adequately to the new environment.
Conventional economic wisdom has always called for active labour market policies and retraining. While
some of these measures have been employed, they have tended to be piecemeal and inadequate to the
task, so more needs to be done.
Evidence presented in the Outlook shows that globalisation, in par-
ticular growing trade and investment flows and the increased involve-
ment of emerging markets in the world economy, has brought benefits to all countries. This is quite different
from saying that the gains are also shared evenly. The great surges in income inequality post-WWII seem to
have occurred after two significant globalisation movements and, in recent years, there is strong evidence
of a “hollowing out” of the middle class in advanced countries related to trade and technology. This sug-
gests the need for a debate on the issue of globalisation and fairness in the distribution of gains from trade
and international investment. This complex issue needs to move beyond generalisations about “openness”
towards providing more detailed (“granular”) evidence on the diverse factors at work.
The extraordinary success some large emerging economies have had in pulling millions of people out of
poverty in the past couple of decades is one of the most positive aspects of globalisation. This has also had
many benefits for advanced economies, such as cheaper imported consumer goods and increased exports
to newly-industrialising nations. Evidence is also presented to show that in recent years the sheer scale of
these successes, in conjunction with other related developments such as digitalisation, technology and
innovation, is adversely affecting some low-skill and middle-class jobs in advanced countries.
In a sense, the whole process of globalisation is being put to the test and raises questions about the balance
between traditional domestic policies and the need for stronger global level-playing-field rules for cross-
border activities.
On the domestic policy side, advanced economies have not done enough with respect to infrastructure
investment, structural reforms, safety nets, worker retraining, education, and kick-start adjustment support
for trade-exposed workers. These aspects at least have the advantage that sovereign governments can
take decisions to do more. There is no such authority for the international governance of the cross-border
activities of private companies and state-owned enterprises. Developed and emerging economies have not
done enough to promote a level playing field.
This Outlook focuses mainly on these cross-border issues, the combined effects of which have neither been
adequately researched nor addressed in effective policy action.
Globalisation is being tested
Better global governance
is urgently required

3
% OF WORLD EXPORTS
0
5
10
15
20
201520102005200019951990198519801975197019651960
Japan
United Kingdom
United States
Italy
Germany
France
Canada
China
Australia
Spain
Brazil, Mexico and South Africa
India, Indonesia and Malaysia
Hong Kong, China; Korea and Singapore
Figure 1. Share of world merchandise exports of selected economies, 1960-2015
Source: International Monetary Fund, OECD calculations.
% OF WORLD GROSS FIXED CAPITAL FORMATION
0
5
10
15
20
25
30
35
40
201520102005200019951990198519801975197019651960
Japan
United Kingdom
United States
Italy
Germany
France
Canada
China
Australia
Spain
Brazil, Mexico and South Africa
India, Indonesia and Malaysia
Chinese Taipei; Hong Kong, China;
Korea; and Singapore
Figure 2. Share of gross fixed capital formation of selected economies, 1960-2015
Source: The World Bank , OECD National Accounts, OECD calculations.

4
However, in addition to improved domestic labour market adjustment and macro policies, what is needed is
globalisation that operates according to a common set of rules and principles. This has been the relatively
neglected area where not enough progress has been made. Without this, countries and companies acting
in their own self-interest may use tactics and policies to distort the outcomes of greater openness in their
favour. In so doing, they risk retaliation and interfere with market-based economic adjustments, block the
path of firms to improved productivity growth and exacerbate effects on trade- and technology-exposed
workers. Thus, the net gains from openness will be smaller than they might have been and may not be
shared according to productivity-based economic merit. Left unaddressed, the burden on domestic policy
is unnecessarily increased.
-0.12 -0.09 -0.06 -0.03 0.00 0.03 0.06 0.09 0.12 0.15
United States
United Kingdom
Sweden
Spain
Portugal
Norway
Netherlands
Luxembourg
Italy
Ireland
Greece
Germany
France
Finland
Denmark
Belgium
Austria
High-paying occupations Middle-paying occupations Low-paying occupations
DIFFERENCES IN THE SHARE OF EMPLOYEES
Figure 3. Differences in share of employment between 2000 and 2015 by pay category
(percentage points)
Notes: This figure shows changes in employment shares between 2000 and 2015. The data include all persons aged 15-65 who
reported employment in the sample reference year, excluding those employed by the army. Occupations are first assigned by
International Standard Classification of Occupations (ISCO) categories that are consistent over the whole period. These occupations
are then grouped into three broad categories by wage levels as in Goos et al. (2014).
Source: Eurostat, US Bureau of Labour Statistics, OECD calculations.

5
The ability of the world to grow with stable and rising living standards
for all depends on productivity growth which makes it possible for all
participants in the economy to be better rewarded over time. Macro
enabling factors such as infrastructure investment are available to all players, but not all firms succeed in
taking advantage of them to drive innovation and growth. The business and finance aspects of the current
economic situation require a closer look at companies. Why some firms succeed and others fail, and whether
there are enough of the former and an appropriate exit of the latter, is critical for understanding the impact of
globalisation on those most exposed to greater integration with the rest of the world.
Based on a large global sample of companies, the Outlook presents OECD empirical research which is
consistent with the new firm-based trade and productivity theories. This is a process whereby the most
successful (cash-flow-generative) firms invest more in technology (via research and development), attract
higher skilled labour, and expand through increased foreign sales. This, in turn, generates further economies
of scale and innovations. The evidence shows that it is precisely the companies that succeed the most in
raising productivity through entry to foreign markets and innovation that are associated with better returns,
and rising value added and wages per worker. Companies that do not innovate and/or compete well glob-
ally see declining returns and falling average value added and wages for their workers. These pressures
occur within industries, rather than between them. While all industries are affected in this way, evidence
from the vast “Materials” and “Industrials” sectors shows them to be amongst the clearest examples of
this phenomenon.
0.00
0.05
0.10
0.15
0.20
0.25
0.30
0.35
0.40
D10D9D8D7D6D5D4D3D2D1
0.00
0.05
0.10
0.15
0.20
0.25
USD BILLION USD BILLION / 1 000 EMPLOYEES
DECILE NUMBER
International sales Net sales Value added per capita (RHS)
0
5 000
10 000
15 000
20 000
25 000
30 000
35 000
USD BILLION USD BILLION / 1 000 EMPLOYEES
DECILE NUMBER
0
2 000
4 000
6 000
8 000
10 000
12 000
EMERGING
ADVANCED
Figure 4. Company productivity levels versus international sales by productivity growth decile, 2002-2016
Note: RHS stands for Right Hand Scale
Source: Bloomberg, OECD calculations.
Company insights on
globalisation

6
Inconsistent financial regulations are driving risks into new areas. There
has been huge progress in improving the quality and quantity of bank
capital, and new Basel regulations have helped to deal with liquidity and
funding problems that emerged in the crisis. But two anomalies remain.
One derives from differences in the role of banks versus capital markets in different jurisdictions that leads
to competitiveness and considerations other than financial stability in writing regulatory rules in practice.
The other is more technical in nature, and stems from persisting with the Basel II idea that allowing banks
to use internal risk models to calculate capital weightings is permissible. It is shown that the Basel risk
weighting system gives banks scope to have different leverage for the same capital rule in different banks
and jurisdictions in contrast to the goal of a level playing field. On average, the ratio of risk-weighted asset to
which the capital rule applies for global systemically important banks was driven down (i.e. leverage up) from
50% in 2003 to 34% by 2008. The aftermath of the crisis has seen deleveraging and a sharp pulling back of
capital from cross-border activities in most advanced countries as re-regulation proceeds.
Openness promotes opportunities for business. But the governance of trade, international investment and
competition has not advanced enough to foster better outcomes. Empirical evidence in the Outlook shows
how an uneven playing field can block economies of scale, misallocate resources and undermine fair com-
petition. The Outlook then discusses global governance issues (the “rules” and “norms”) in relation to eight
contributing factors: exchange rate and capital account management; financial regulation; subsidies for (and
the governance of) state-owned enterprises; collusion in the form of cross-border cartels; higher costs of
underwriting new equity and bond financing resulting from the way fees are charged by global financial firms;
barriers to trade in financial services that have unintended consequences preventing insurance and pension
funds from doing an adequate job; responsible business conduct in global supply chains; and bribery and
corruption in international investment.
Whether undertaken by advanced or emerging economies, exchange
rate targeting, supported by capital account management, and/or the
setting of traded goods prices for market share (with state support),
distorts relative prices. These practices have the potential to shift gains
in foreign sales of firms from one country in favour of those of another, and therefore to block company paths
to higher productivity via economies of scale. The Outlook presents empirical evidence on the extent of over-
and under-valuation which suggests the issue is quite complex. Based on purchasing power parity, the real
exchange rate is overvalued for most advanced countries (above the level justified by real living standards), is
more neutral for China following recent weakness (despite heavy intervention to resist appreciation in earlier
years), while other emerging economies such as India appear undervalued. Depending on their level of
development, some economies may wish to resist moving into overvaluation territory (as advanced countries
tried to do in early post-WWII years). The exchange rate effects in a gravity model of exports are found to
be not that strong. Exchange rates may, however, be less important than a tradable-goods-pricing strategy
focused on winning and maintaining market share. With government backing, profit margins of state-owned
enterprises, for example, can be used to offset changes in costs and the exchange rate. Subsidies and other
cost-reduction factors may also help in this regard.
The evidence from a gravity model of exports is much clearer for the capital account management policies
that often accompany managed exchange rate regimes. Since 2001, when the vast Asian market became
better integrated into expanding global value chains, openness with respect to investment and the capital
account has become more important in supporting bilateral trade. This evidence relates both to foreign
direct investment (FDI) and banking and portfolio flows. In terms of better level-playing-field rules in this area,
the OECD Codes of Liberalisation are designed to make capital account management policies more trans-
parent and provide a framework for moving towards more openness in the longer run, while still allowing for
different stages of economic development.
ISSUE 1:
Exchange rate and
capital account management
ISSUE 2:
Financial regulation
and risk

7
-1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0
Minimum MaximumAverage 1990-2015
Japan
Iceland
Sweden
Denmark
Switzerland
United Kingdom
Israel
Australia
Norway
Canada
New Zealand
Korea
Argentina
Euro area
Croatia
Czech Republic
South Africa
Brazil
Chile
Mexico
China
Turkey
Poland
Hungary
India
Indonesia
Bulgaria
Russia
Saudi Arabia
EXCHANGE RATE VALUATION MEASURE
UNDERVALUEDOVERVALUED
Figure 5. Five-year rolling real exchange rate valuation for selected economies, 1990-2015
Note: The overvaluation and undervaluation exchange rate measure is derived from the Rodrick (2008) model. It is an exchange rate
measure based on domestic price level adjusted for the Balassa-Samuelson effect. Whenever UNDERVAL exceeds unity, it indicates
that the exchange rate is set such that goods produced at home are relatively cheap in US dollar terms: the currency is undervalued.
When UNDERVAL is below unity, the currency is overvalued. Selected countries included in the chart are OECD countries or G20
members. The statistical data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such
data by the OECD is without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank
under the terms of international law.

8
Figure 6. Core Tier 1 risk-weighted capital ratio versus Basel III leverage ratio for G-SIBs, 2008-2016
Note: USA: United States; EA: Euro Area; GBR: United Kingdom; CHE: Switzerland; SWE: Sweden; JPN: Japan; CHN: China. G-SIB
stands for Global Systemically Important Bank. IFRS stands for International Financial Reporting Standards.
Source: Bloomberg, SNL Financials, OECD calculations.
Average 2008-2010 2016 Basel III 2019
% OF RISK-WEIGHTED ASSETS
0
5
10
15
20
302928271817161514131211109262524232221201987654321
Average 2008-2010 2016 Basel III phase-in-arrangements
% OF TOTAL ASSETS (IFRS)
0
1
2
3
4
5
6
7
8
302928272625242322212019181716151413121110987654321
OECD threshold
EA GBR CHE SWE JPN CHNUSA
EA GBR CHE SWE JPN CHNUSA
The attempt (by “shadow banks” and countries previously dependent on cross-border banking flows) to
deal with the effects of regulatory reform and bank business model changes in advanced countries may
increase contagion risk between sectors. For advanced countries, empirical evidence in the Outlook shows
improvement in this regard only in the United States, with contagion risk between banks and shadow banks
largely unchanged post-2008 in Europe and the United Kingdom, and some mixed evidence in Japan and
Australia. Increased contagion is most extreme in emerging markets, where the use of off-balance sheet
special purpose vehicles (particularly so-called wealth management products managed by banks) has con-
tributed to the emergence of two-way contagion risk between the riskiness of banks and shadow banks
(significant even at the 1% level). This was not statistically identifiable prior to 2008. The Outlook discusses
broad principles that would serve to level the regulatory playing field.

9
Distortions resulting from subsidies and other advantages tend to be
greater when state-owned enterprises (SOEs) are involved. Unlike
exchange management, these supports, where present, are pointed
to particular industries and enterprises, often motivated by strategic
interests. SOEs have grown as a share of key world industrial sectors and most are domiciled in Asia.
Importantly, they include very large financial companies which play a key role in funding other SOEs across
most business sectors and sometimes on favourable terms. This, and other forms of government support,
has raised concerns about unfair practices that make for an uneven playing field and contribute to excess
capacity in some industries. This, in turn, exerts downward pressure on margins and the return on equity
(ROE) versus the cost of capital (COK) more generally. In advanced economies, ROE versus the COK for a
large selection of private and SOEs move in line, but have declined from the 8% to 10% range in 2005 to 4%
to 6% more recently. ROE minus the COK for emerging economy companies on the same basis have fallen
from 4% to 6% to -1% to 1%.
Where excess capacity has emerged, concerns also arise about the difficulty of reducing production poten-
tial and facilitating the exit of inefficient firms in the SOE sector. Company data show the high levels of
debt of emerging economy SOEs. Since fixed costs are high, this indebtedness gives rise to incentives to
produce and export more in order to reduce variable costs. The Outlook provides evidence on the exporting
of excess capacity. Industrial policies based on infant-industry protection and state aid need to be carefully
calibrated if they aim to correct market failures; otherwise they will undermine competitive neutrality and
weaken incentives for the entry of more productive firms and the exit of inefficient ones. Such policies can
lead to trade and investment tensions, including barriers to cross-border FDI flows, when unfair support is
suspected. Rules to ensure a level playing field for private versus SOE competition remain necessary. The
OECD has published an extensive body of guidance on SOE governance and ownership practices which is
designed to deal directly with many of these issues.
% OF TOTAL ASSETS
0
10
20
30
40
50
2016201520142013201220112010200920082007200620052004200320022001
All banks G-SIBs
y = -1.15x + 41.76
R² = 0.83
y = -0.78x + 26.62
R² = 0.66
Figure 7. Ratio of risk-weighted assets to total assets: G-SIBs versus full universe of large banks, 2001-2016
Notes: G-SIB stands for Global Systemically Important Bank. The sample includes 129 large global banks over the period 2001-2016.
All G-SIBs listed by the Financial Stability Board (2016) are included. Based on Sarin and Summers (2016), the six US G-SIBs, the
fifty largest US banks by 2016 assets, the fifty-five largest banks in the world ranked by market capitalisation (including European,
Japanese and Australian G-SIBs) and eighteen listed domestic systemically important European banks identified by the European
Banking Authority. Following Ayadi et al. (2015), banks considered as systemic in this paper are the ones identifiable in the list of banks
which are directly supervised by the ECB, non-Euro area EBA stress tested and Swiss banks with more than €30 billion. Chinese
banks are excluded from the sample as state ownership involves different issues than for the ones relevant for the other banks con-
sidered in this paper. Financial statement data are collected from SNL Financials and Bloomberg. For consistency purposes, financial
statements reported under GAAP accounting standards are adjusted to be comparable with IFRS basis.
Source: SNL Financials, Bloomberg, OECD calculations.
ISSUE 3:
State-owned enterprises
and excess capacity

10
Advanced economies Emerging economies
% OF MARKET CAPITALISATION
0 10 20 30 40 50
Banking
Utilities
Telecommunication services
Information technology
Healthcare
Consumer staples
Consumer discretionary
Industrials
Materials
Energy
All sectors
Figure 8. Listed state-owned enterprises by sector in advanced and emerging economies, average 2002-2016
%
-4
-2
0
2
4
6
8
10
12
201620152014201320122011201020092008200720062005200420032002
Advanced SOE Advanced Non-SOE Emerging SOE Emerging Non-SOE
Figure 9. Return on equity minus the cost of capital for private non-financial companies versus state-owned
enterprises in advanced and emerging economies, 2002-2016
Note: These figures relate to listed companies where government holds 20% or more of the shares (for the most part, a lot more
and often over 50%). Averages refer to the annual percent market cap shares over the period 2002-2016. Companies were drawn
from a total pool of the 11 000 largest listed companies in the world and allocated to advanced or emerging economies.

11
Competition between multinational firms drives out inefficiencies and
creates economies of scale. This helps to reduce prices and pass on
the benefits of globalisation to consumers. However, collusion through
cross-border cartels can deny consumers these benefits and pass them instead, through higher prices, to
profits and ultimately to the owners of shares. This overcharging hurts consumers and hits low-income fami-
lies hardest in what they pay for necessities in areas such as banking, pharmaceuticals, retail services, trans-
port, and white goods. This is no small matter. Two hundred and forty cross-border cartels were detected
and fined between 1990 and 2015, affecting USD 7.5 trillion in sales. Average overcharging amounted to
20% of sales, and, for some essential commodities, such as pharmaceuticals, was at times much higher.
In a sense, the import competition-exposed worker is hit twice: via employment and wage remuneration
while paying higher prices for essential goods and services. The need to address the issue of cross-border
cartels and overcharging goes hand in hand with other considerations bearing on the level playing field—
consumers as well as companies need to be treated fairly. The cross-border activities of SOEs also fall into
the competition policy domain, intersecting with corporate governance issues, if competitive neutrality is to
be maintained. OECD instruments on bid rigging, dealing with hard core cartels and the way to enhance
co-operation between competition agencies are all designed to deal with these issues.
NUMBER OF CASES
0
50
100
150
200
250
300
20152010200520001995199019851983
Number of cross-border cartels fined
in more than one jurisdiction
Number of cross-border cartels detected
1986
289
135
Figure 10. Cumulative cross-border cartel detection and fines
Note: No data is available for 1986 and 1988.
Source: Connor (2016) and OECD calculations.
ISSUE 4:
Cross-border cartels
ISSUE 5:
High costs in underwriting and
the cost of capital
The activities of some global firms that adversely affect the ability of
others to grow illustrates that it is not only government support that
undermines competitive outcomes. Equity finance is well-suited to
long-term risk taking on investment projects (where a failure does not
leave a firm with an unsupported debt burden). Yet, since the crisis, corporate debt issuance has been
enormous (particularly from emerging markets) and equity initial public offerings (IPOs) have fallen off. This
has been associated with US, UK and European investment banks losing market share, primarily to Chinese
banks. While the one lead underwriter model has given way to consortiums of banks and more cross-border
involvement in underwriting for corporate issuance, high levels of fees and parallel pricing appear to have
increased. The median underwriting fee for US IPOs is 7%, and this has risen to 8% in Japan and China,
doubling in the case of the latter. These high fees, which constitute more than 60% of the total cost, are a
neglected aspect of the explanation for falling IPO issuance. In the case of IPOs of less than USD 100 million,
the average cost is 9% to 11% of the transaction. This means that for every 10 IPOs, the market value on
an entire new company accrues to fees. This increases the cost of equity and works against long-term
productive investment. Reinforcing competitive conditions in these markets could lead to better outcomes.)

12
Source: Thomson Reuters, OECD calculations.
Figure 11. Market share of investment banks in underwriting, pre-crisis versus post-crisis
China Europe
(excluding United Kingdom)
CORPORATE BONDS
INITIAL PUBLIC OFFERINGS
Rest of the worldUnited States
0
20
40
60
80
100
Post-crisisPre-crisisPost-crisisPre-crisisPost-crisisPre-crisisPost-crisisPre-crisis
United States United Kingdom China Japan Europe (excluding United Kingdom)
Asia (excluding China and Japan) Rest of the world
%
China Europe
(excluding United Kingdom)
Rest of the worldUnited States
0
20
40
60
80
100
Post-crisisPre-crisisPost-crisisPre-crisisPost-crisisPre-crisisPost-crisisPre-crisis
%
Origin of the bank:

13
%
0
1
2
3
4
5
6
7
8
9
201620142012201020082006200420022000
United States Japan ChinaEurope (excluding United Kingdom)
INITIAL PUBLIC OFFERINGS %
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
201620142012201020082006200420022000
CORPORATE BONDS
Figure 12. Underwriting fees as a percentage of total proceeds, median values, 2000-2016
Note: There are no observations on Chinese IPOs for 2013.
Source: Thomson Reuters, OECD calculations.
ISSUE 6:
Cross-border barriers to trade
in financial services
Direct barriers to trade in financial services (like other trade restrictions)
work against a well-functioning global economy. The Outlook provides
three examples. First, the benefits of international reinsurance in terms
of being able to absorb the burden of large-scale catastrophe losses
may not be realised where (unwarranted) regulatory impediments are placed on insurance companies’ ability
to transfer these risks within international markets. This is because global pooling is critical to reinsurance.
Second, domestic rules and regulations for pension funds that encourage them towards a home-country
bias increase the difficulty of achieving funding targets and reduce diversification benefits. Finally, with
respect to Brexit, the City of London is an agglomeration that serves the global financial system from which
economies of scale and scope (internal to the location) are derived. Commitments under the OECD Codes
of Liberalisation provide ample room for a pragmatic approach to the United Kingdom’s exit from Europe.
Figure 13. Share of claims paid by international insurance and reinsurance markets
Source: Global Reinsurance Forum (2014). The claims payments in the case of Superstorm Sandy exclude claims paid by the
US National Flood Insurance Program.
European reinsurers
46%
US primary
insurers
21%
US reinsurers
15%
Bermuda
reinsurers
9%
Japanese reinsurers
9%
European reinsurers
27%
US reinsurers
16%
US primary
insurers
37%
Bermuda
reinsurers
7%
Other
4%September 11
2001
Superstorm
Sandy
2012

14
ISSUE 8:
Bribery and corruption
Bribery of foreign officials and corruption distort the allocation of
resources and undermine the benefits of globalisation. Rent-seeking
behaviour through bribery and corruption is estimated by the World
Bank to be 2% to 3% of world GDP (equivalent to the size of the French economy). This wastes resources.
It enables less dynamic companies to win contracts in countries with weak bribery laws and/or poor
enforcement at the expense of more productive companies. Bribery and corruption cause economic rents
to be diverted to private benefits (including to dictators and military leaders) rather than being invested in
technology, education and training, and quality infrastructure in the host country. Such investment would
enhance productivity growth and allow real incomes to support demand in emerging economies. An OECD
empirical study shows that strong bribery laws consistent with the OECD Anti-Bribery Convention cause
adherent countries to invest less in corrupt regimes and more in countries with sound property rights and
accountability. A one point rise in the World Bank corruption index in the host country (within a 0-10 range)
will see FDI from countries that have ratified the OECD Anti-Bribery Convention fall by between 4% and 9%.
Corrupt countries therefore forego the benefits of more investment (and hence better productivity growth)
from very large OECD countries that are amongst the largest FDI investors.
The Outlook also takes a first look at bribes paid by financial intermediaries that play a key role in the allocation
of resources. The perception that high-level managers of financial firms from wealthy countries bribe officials
from poor countries (most often inside SOEs) appears to be correct. This contributes to creating an invest-
ment climate whereby globalisation does not work for important segments of the world population. Greater
adherence to, and enforcement of, the OECD Anti-Bribery Convention would help to increase the number of
less corrupt foreign investment destinations, thereby helping to level the playing field and promote sustainable
growth. Stricter enforcement could help to improve the perception of globalisation in the world economy.
ISSUE 7:
Responsible business conduct
and due diligence in global
supply chains
Responsible business conduct (RBC) is concerned with social and
environmental issues as well as global business outcomes in the
context of supply chain management and its perceived impact on
affected communities. While much of the Outlook focuses on distor-
tions to pricing or inconsistent regulations that raise “fairness” issues,
RBC pertains to global business outcomes in the context of sustainability of supply chains. Gains from
trade and international investment apply to all points (upstream and downstream) in the supply chain, and
sustainability of these cross-border linkages is important for long-term growth. Supply chains may be dis-
rupted when human rights issues, damage to the local environment, and over-exploitation of resources result
in disputes with local communities, strikes, government interventions and legal processes. It is important
not to focus on short-term profits at the expense of supply-chain sustainability and longer-term financial
performance for investors.
Sustainable supply chains and better company financial performance can go hand in hand—a “win-win”
outcome. The Outlook presents evidence which shows (after allowing for other control factors) that a rise in the
social score component of the Thomson Reuters Economic, Social and Governance (ESG) index improves
company financial outcomes. A rise of 0.5 in the ESG score (a normalised Z-score between 0 and 1.0
that is based on a survey of 6 000 global companies) increases, on average, the return on equity for com-
panies in the sample by around 2.5 percentage points. Numerous academic studies also support the pos-
itive impact on company results. Thus, pursuing due-diligence strategies in supply chain management
could have a strong potential to improve trust and reduce social and environmental disruptions to trade and
international investment flows which block firm-level paths to better productivity and sustainable growth.
OECD instruments relating to the behaviour of multinational enterprises and supply chain due diligence are
well suited to this task.

15
Actual foreign investments Limit on foreign investments
% OF TOTAL INVESTMENT
0 20 40 60 80 100
Tanzania
Nigeria
India
Egypt
Dominican Republic
Brazil
Turkey i, j
Thailand
Colombiak
Costa Ricaj
Romania
Jamaica
Zambiaa
Trinidad and Tobagoi
Germanyh
Mexico
Israel
South Africa a, g
Japanf
Mauritius
Iceland
Denmarke
United Kingdom
FYR of Macedonia
United Statesd
Norway
Australiac
Canada
Switzerland
Perub
Sloveniaa
Chileb
Bulgaria
Italy
Portugal
Namibiaa
Latvia
Lithuania
Slovak Republic
Estonia
Netherlands
Kosovo
not allowed
not allowed
not allowed
not allowed
not allowed
Figure 14. Pension fund investment abroad and restrictions in selected economies, 2015
Notes: This chart shows the share of pension fund portfolios allocated abroad and the regulatory limit on foreign investments set
up by each country. When the investment limit is 100%, this means that pension funds could invest all their porftolios in assets issued
abroad in theory. There may be however a restriction on the geographical area where pension funds can invest in and a limit on foreign
currency exposure.
(a) Data refer to 2014. (b) The investment limit is an overall limit for pension fund administrators that manage several funds and invest
assets differently depending on the fund. (c) The share of foreign investments only refers to the share of the portfolio invested in
international fixed income, international listed equity and International unlisted infrastructure by APRA regulated funds with more than
four members. (d) The share of foreign investments of pension funds in the United States is a weighted average of the share of foreign
investments of four large pension funds in 2014 (Illinois SURS, NYCRS, LACERA and United Nations Joint Staff Pension Fund) and of
one other pension fund in 2012 (CalPERS), weighted by assets of these funds (source: OECD Annual Survey of Large Pension Funds).
(e) Data refer to defined contribution plans only. (f) Data on the actual share of investments abroad comes from Bank of Japan. (g) Data
only refer to the funds supervised under the Pension Funds Act. (h) Data on foreign investments come from PwC report “Beyond their
Borders - Evolution of foreign investment by pension funds”. (i) Data refer to 2012. (j) Data refer to personal plans only. (k) The limit given
in this chart is the most binding limit (that applies to the conservative fund and the programmed retirement fund).
The limit is higher for the moderate fund (60%) and the great risk fund (70%).
Source: OECD Survey on investment regulation, OECD Global Pension Statistics, OECD calculations.

16
Figure 15. GDP per capita and the World Bank Corruption Index, 1997-2015
Source: World Bank, OECD calculations.
Figure 16. Corruption, foreign direct investment and adherents versus non-adherents to the OECD Anti-Bribery
Convention, 2000-2015
Note: The dotted line shows a linear trend while the solid line shows a quadratic one.
0 10 000 20 000 30 000 40 000 50 000 60 000 70 000 80 000 90 000 100 000 110 000
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
10000
Circled data points are related to Luxembourg,
Norway, Switzerland, United States
GDP PER CAPITA, PPP (CONSTANT 2011 INTERNATIONAL $)
CONTROL OF CORRUPTION INDEX
OECD Non-OECD
-2 -1 0 1 2 3 4 5 6 7 8
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
FDI OUTFLOWS (PERCENT OF GDP)
CONTROL OF CORRUPTION INDEX
Adherents Non-adherents

17
The Outlook provides detailed evidence that suggests that the problems (such
as inequality, the hollowing out of the middle class and employment of unskilled
workers in advanced countries) often associated with globalisation do not
originate from economic “openness” as such. Instead, while recognising that not enough has been done
with respect to domestic structural adjustment policy, the Outlook shows that the absence of a level playing
field in a number of cross-border areas that affect trade, investment and competition outcomes is also
playing an important role. This evidence warrants policy action. Levelling the playing field would help to
reduce the extent of the problems to be dealt with by domestic policy. OECD standards can play a leading
role in shaping this conversation, and helping to ensure a more level playing field in trade, investment and
corporate behaviour so that the benefits of globalisation are shared by all. This requires countries partici-
pating in globalised markets to commit to a common set of transparent principles that are consistent with
mutually beneficial competition, trade and international investment.
Conclusions

18
* This list does not include OECD standards relating to international taxation.
OECD STANDARDS ON INTERNATIONAL GOVERNANCE OF BUSINESS ACTIVITIES*
BRIBERY AND CORRUPTION
Convention on Combating
Bribery of Foreign Public
Officials in International
Business Transactions
Entry into force 1999
The Convention is a legally binding international agreement that puts the OECD at
the forefront of global efforts to fight bribery of foreign public officials in international
trade and investment. Parties to the Convention agree to establish the bribery of
foreign public officials as a criminal offence under their laws and to investigate, pros-
ecute and sanction this offence. The Convention is the first and only international
anti-corruption instrument focused on the “supply side” of the bribery transaction –
the person or entity offering, promising or giving a bribe. The 41 Parties to the
Convention are collectively responsible for 64% of global FDI outflows and over 50%
of world exports. They are home to 95 of the largest 100 non-financial multinational
enterprises and to all of the top 60 financial multinational enterprises. The Parties’
shared commitment to the fight against foreign bribery is grounded in the recogni-
tion that no government or market economy can function effectively if it is riddled
by bribery.
www.oecd.org/corruption/anti-bribery
RESPONSIBLE BUSINESS CONDUCT
OECD Guidelines for
Multinational Enterprises
Adopted 1976
Last updated 2011
The Guidelines are addressed by governments to multinational enterprises oper-
ating in or from adhering countries and provide standards for responsible business
conduct in a global context consistent with applicable laws and internationally rec-
ognised standards. Their implementation is supported by a non-judicial grievance
mechanism. This “specific instances” mechanism has been part of the Guidelines
since 2000 and over 360 specific instances have been treated to date. The 47 coun-
tries currently adhering to the Guidelines include 14 G20 members which means
that the Guidelines cover a large majority of global supply chains. The enterprises in
adhering countries accounted for 75% of FDI outflows and 58% of global FDI inflows
between 2010 and 2015, as well as 81% of global FDI outward stock as of end 2014.
http://mneguidelines.oecd.org/guidelines/
OECD Due Diligence
Guidance for Responsible
Supply Chains of Minerals
from Conflict-Affected and
High-Risk Areas
Adopted 2011
Last updated 2016
TheGuidanceclarifieshowcompaniescanidentifyandbettermanagerisksthroughout
the entire mineral supply chain, from miners, local exporters and mineral processors
to the manufacturing and brand-name companies that use these minerals in their
products. The Guidance aims to help companies respect human rights, observe
applicable rules of international humanitarian law in situations of armed conflict, avoid
contributing to conflict and cultivate transparent mineral supply chains and sustainable
corporate engagement in the mineral sector. It is the leading industry standard for
companies looking to live up to the expectations of both the international community
and customers on mineral supply chain transparency and integrity.
http://mneguidelines.oecd.org/mining.htm
CAPITAL FLOWS AND FINANCE
OECD Code of Liberalisation
of Capital Movements
Adopted 1961
Update underway
The Code is an international agreement under which adherents commit to pro-
gressively liberalise capital flows. They may lodge reservations as regards oper-
ations they are not in a position to liberalise at the time of adherence and at any
time as regards short-term capital flow operations. In situations of serious balance
of payment difficulties or economic and financial disturbance, adherents can also
avail themselves of the derogation clauses of the Code for new restrictions on other
operations. A system of notification and peer monitoring ensures transparency and
mutual accountability in adherents’ policies related to capital flows.
www.oecd.org/investment/codes.htm

19
CORPORATE GOVERNANCE
G20/OECD Principles
of Corporate Governance
Adopted 1999
Last updated 2015
The Principles provide policy makers with the key legal, regulatory and institutional
building blocks that help companies’ access capital markets while reassuring inves-
tors that their rights are protected. They provide recommendations in a number of
critical areas such as the rights of shareholders, the functioning of the investment
intermediation, stock market practices, the role of stakeholders, corporate disclo-
sure and the responsibilities of the board of directors. They also address the quality
of supervision and enforcement. The Principles are one of the Financial Stability
Board’s twelve key standards for sound financial systems.
www.oecd.org/corporate/principles-corporate-governance.htm
OECD Guidelines
on Corporate Governance
of State-Owned Enterprises
Adopted 2005
Last updated 2015
The Guidelines advise public authorities on how to effectively manage their respon-
sibilities as company owners, making SOEs more efficient and transparent. They
provide concrete guidance on how to ensure that SOEs do not have any undue
competitive advantages when they operate in markets and establish good practices
for financial and non-financial disclosure by the SOEs and their owners. From their
inception in 2005, the Guidelines have served as an international benchmark for the
corporatisation and commercialisation of SOEs. Increasingly they have also come to
serve as a reference for international trade and investment regulators for assessing
internationally active SOEs.
www.oecd.org/daf/ca/guidelines-corporate-governance-soes.htm
COMPETITION
OECD Recommendation
concerning Effective Action
against Hard Core Cartels
Adopted 1998
The Recommendation sets out a common approach to cartels. This is important
because of the market power, waste and inefficiency in international trade that
cartels create. This Recommendation calls for adherents to ensure their competition
laws effectively halt and deter hard core cartels by providing for effective sanctions,
and ensuring enforcement procedures and institutions are adequate to detect and
remedy hard core cartels (including powers to obtain information and impose pen-
alties for non-compliance).
www.oecd.org/daf/competition/2350130.pdf
OECD Guidelines
for Fighting Bid Rigging
in Public Procurement
Adopted 2009
The Guidelines contain practical tools to assist governments with the detection and
prevention of bid rigging, where firms conspire to raise prices or lower the quality
of goods or services they provide to governments. Without established processes
and a clear understanding of bidder behaviour, laws against bid rigging can be
challenging to enforce. The Guidelines illustrate common bid rigging strategies, and
identify aspects of goods, services or industries that facilitate collusion. They also
include checklists for designing procurement processes to reduce the risks of bid
rigging and for the detection of bid rigging.
www.oecd.org/competition/guidelinesforfightingbidrigginginpublicprocure-
ment.htm
OECD Recommendation
on Fighting Bid Rigging
in Public Procurement
Adopted 2012
The Recommendation contains a detailed set of practices for public procurement
officials at all levels of government to follow. These measures, in addition to the
Guidelines described above, include: techniques to promote competition through
tender design, procedures and selection criteria, using electronic bidding systems,
and encouraging awareness of the signs of collusion. These recommendations are
equally applicable to local or cross-border situations.
www.oecd.org/competition/oecdrecommendationonfightingbidrigginginpub-
licprocurement.htm

20
OECD Recommendation
concerning International
Co-operation on
Competition Investigations
and Proceedings
Adopted 2014
The Recommendation calls for adherents to commit to effective international co-op-
eration including, where appropriate and practicable, providing each other with
relevant information that enables their competition authorities to investigate anticom-
petitive practices. The Recommendation also states that competition authorities of
the adherents should support each other on a voluntary basis in their enforcement
activity by providing each other with investigative assistance.
www.oecd.org/daf/competition/2014-rec-internat-coop-competition.pdf
PENSIONS AND RETIREMENT SAVINGS
OECD Core Principles
of Private Pension
Regulation
Adopted 2009
Last updated 2016
The Principles can help countries to avoid creating artificial cross-border barriers
to appropriate global asset diversification. Pension funds, insurance companies
and managers of assets earmarked for retirement have the duty of managing those
assets in the best interest of their members, current and future retirees. This requires
using a prudent person approach and investing assets in financial instruments that
are expected to provide the highest return at the lowest risk possible, that is, the
highest risk-adjusted returns on a sustainable basis. The Core Principles recom-
mend that portfolio investment should take principles related to risk diversification
into account and that investing abroad should be permitted, subject to prudent
management principles. Investors should build their portfolios taking into account
foreign investment opportunities to improve risk diversification with the idea that
investors should invest according to global market capitalisation.
www.oecd.org/finance/principles-private-pension-regulation.htm

This work is published under the responsibility of the Secretary-General of the OECD. The opinions expressed and arguments
employed herein do not necessarily reflect the official views of OECD member countries. This document and any map included herein
are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and boundaries and
to the name of any territory, city or area.
REFERENCES
Ayadi, R., De Groen, W. P., 2015. “Banking Business Model Monitor 2015 in Europe”,
International Research Center on Cooperative Finance, HEC Montreal.
Connor, J.M. (2016), “Cartel Overcharges”, Research in Law and Economics, vol. 26.
Financial Stability Board, 2016. 2016 list of global systemically important banks (G-SIBs).
www.fsb.org/wp-content/uploads/2016-list-of-global-systemically-important-banks-G-SIBs.pdf.
Global Reinsurance Forum, 2014. Global reinsurance: strengthening disaster risk resilience.
www.grf.info/images/Publications/GRF2014-Global_reinsurance-strengthening_disaster_risk_resilience.pdf.
Goos, M., Manning A., Salomon A., (2014), “Explaining Job Polarization: Routine-Biased Technological Change and
Offshoring”, American Economic Review, 104(8), 2509-2526.
Rodrik, D. (2008), “The Real Exchange Rate and Economic Growth”, Brookings Papers on Economic Activity, Fall.
Sarin, N., Summers, L. H., 2016. “Have Big Banks Gotten Safer?” BPEA Conference Draft.

Globalisation has become associated with difficulties for less-skilled
workers, inequality and a general sense that it is not working for large
sections of society, in both advanced and developing economies.
The 2017 OECD Business and Finance Outlook addresses some of
the forces influencing economic developments that have contributed
to recent surprises in elections and referendums. The common theme
of these surprises has been voter discontent with globalisation and
immigration that are perceived to be causes of unemployment and/or
falling living standards for substantial parts of society.
This booklet reproduces highlights from the third edition of the OECD
Business and Finance Outlook which focuses on ways to enhance
“fairness”, in the sense of strengthening global governance, to ensure
a level playing field in trade, investment and corporate behaviour,
through the setting and better enforcement of global standards.
Policy domains covered include exchange rates and capital account
management, financial regulation since the recent financial crisis, the
rising weight of state-owned enterprises in the global economy, com-
petition policy to deal with international cartels, the cost of raising
capital, responsible business conduct and bribery and corruption.
Find the OECD Business and Finance Outlook online at
www.oecd.org/daf/oecd-business-finance-outlook.htm

OECD Business and Finance Outlook 2017: Highlights

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